Stocks in New York Continue to Unwind

Rising inflation, corporate earnings reports, Fed commentary and record oil prices offer a lot for investors to digest. Home Depot is the worst performer in the Dow.
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Updated from 1:49 p.m. EDT

Stocks in the U.S. were mired in the red Tuesday as sellers swarmed Wall Street amid a slew of bad tidings, including warmer-than-expected inflationary data, negative news on the corporate side and another record for oil prices.

The

Dow Jones Industrial Average

tanked 212 points, or 1.6%, to 12,817 under the weight of

Home Depot

(HD) - Get Report

, the day's worst-performing component. The other 29 stocks the Dow tracks -- with the exception of energy giant

Chevron

(CVX) - Get Report

-- likewise headed downhill.

Broader indices were performing a bit better, but were still well under water: the

S&P 500

sank 13 points, or 0.9%, to 1413, and the

Nasdaq Composite

was down 25 points, or 1%, at 2491.

Bill Stone, chief investment strategist with PNC Wealth Management, said investors were probably spooked by the fact that yesterday's big afternoon rally couldn't sustain itself through the end of the day. He also believes today's declines constitute a natural unwinding after a months-long run-up for stocks.

"It's about time for a selloff," said Stone, "You have to take a step back every once in awhile. This doesn't shake me."

Target Beats Estimates, Kinda

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Before the opening bell, the Labor Department said that prices of goods at the wholesale level, excluding the volatile effects of energy and food, rose 0.4% in April from the prior month. That's double the increase that economists were expecting, and also twice the price pickup of the prior month. Year over year, the core index was up 3% -- the biggest gain since December 1991 and topping the 2.8% high set in July 2005.

"That's not a good indication," said Peter Cardillo, chief market economist with Avalon Partners. "It says that higher oil prices are having an effect across the board, and it's being passed onto the consumers to a certain degree."

Still, Ian Shepherdson, chief U.S. economist with High Frequency Economics, pointed out that the numbers are consistent with a mere 2% year-over-year rise for core finished goods a year from now. "Not much to worry about," he said.

James Glassman, senior economist with JPMorgan Chase, went even further. "It's an irrelevant number to me," he said. "It basically represents 16% of what the consumer pays, because it's only focused on domestically made goods, not services. As a matter of fact, I'm surprised the market reacted the way it did."

The headline producer price index, which includes energy and food, registered a 0.2% price rise from the prior month -- half the consensus estimate and down sharply from March's 1.1% jump.

Tony Crescenzi, chief bond market strategist with Miller Tabak and contributor to

RealMoney.com

, a sister site to

TheStreet.com

, wrote: "The only solace in these horrendous figures is the fact that the financial markets have already largely digested the idea that producer prices are rising rapidly, a fact that can't be missed when watching commodities prices on a day-to-day basis."

Meanwhile,

Federal Reserve

vice chairman Donald Kohn predicted that inflation will moderate over time, and that spiking commodities should inflict "limited" spillover effects, in a speech at a New Orleans conference this morning. The caveat, he added, is that those forecasts "depend critically on the continued stability of inflation expectations." He also voiced concern that the public's longer-term expectations may become "unmoored" because of ballooning commodities-strained numbers, or because of a widespread misinterpretation of the Fed's months-long interest-rate easing campaign.

Glassman, however, believes that fear is an unfounded one and that Kohn was probably paying lip service to it. "Those who worry about inflation expectations are living in a textbook," he said. "If we were living in a world where workers were represented by large unions and it was a centralized bargaining process, then inflation expectations could actually affect wage bargains and raise labor costs. But we don't live in those kinds of markets anymore."

Because of that, Glassman said, labor costs -- which, he noted, represent most of what people pay for in any given product -- have been kept mostly under control. "That's why we're seeing these core measures staying pretty well behaved," he said.

Indeed, in his speech Kohn highlighted the evident lack of wage inflation as a positive sign. Stone concurred on this point, noting that overall inflation gets out of control when wages begin chasing prices -- such as they did in 1981, when there was a 9.4% spike in average hourly earnings -- and that this "wage/price spiral" is simply not happening now. "I think we're more disciplined now," he said.

At the same time, June's crude-oil contract, which is due to expire today, shot up to a new all-time high of $129.60 a barrel. Recently, futures were jumping $1.80 to $128.85. Gold futures were up $14.40 to $920.20 an ounce.

The currency markets were acting as another drag, with the dollar tumbling by 1% against both the euro and British pound, while losing 0.6% to the yen at 103.68. The dollar index, which stacks the greenback against a basket of its major counterparts, was off 0.9%.

An analyst note from Brown Brothers Harriman identified one of the main culprits in Germany's Centre for Economic Research, which suggested that the European Central Bank might hike interest rates in the near term. That would further compound the dollar's slide against the euro, and the statement also runs contrary to the ECB's own recent dollar-boosting remarks suggesting it has shifted to a neutral stance.

Among equities, Home Depot said its

first-quarter profit

plunged by two-thirds to $356 million, or 21 cents a share, as the home-improvement goods retailer continued to suffer from housing-sector woes. Excluding a one-time charge related to store closings and paring back of store-growth plans, earnings came to a better-than-expected 41 cents a share. Nonetheless, shares slumped 5.8%.

Also, last night Standard & Poor's cut

Fannie Mae

(FNM)

risk-to-the-government ranking, even while upholding Fannie's ratings for senior unsecured debt, subordinated debt, and preferred stock. Shares were down 4%.

Back in earnings,

Target

(TGT) - Get Report

beat Thomson Reuters's analyst estimates for 71 cents a share by 3 cents, though same-store sales dipped 0.7% and overall revenue

fell short

despite booking a rise from a year earlier. Shares were down 1% to $54.40.

Elsewhere,

Saks

(SKS)

shares surrendered 8.5% after its fiscal first-quarter income, up two-thirds from last year, nevertheless missed Street expectations.

Having a better day was office-supplies retailer

Staples

(SPLS)

, which said its quarterly profit picked up a bit to $212 million as the company benefited from its international exposure. That came a day after Staples went hostile with its $2.34 billion (1.5 billion euros) bid for Dutch-based

Corporate Express

. Staples shares were up a dime at $23.67.

Among those set to report earnings after the market closes, meanwhile, is Dow component

Hewlett-Packard

(HPQ) - Get Report

.

Treasury prices were on the rise. The 10-year note was adding 12/32 in price to yield 3.78%, and the 30-year bond was up 18/32 I price, yielding 4.54%.

Overseas markets were mostly losing ground. Tokyo's Nikkei 225 shed 0.8% overnight, and the Hang Seng Index in Hong Kong sank 2.2%. In Europe, London's FTSE 100 plummeted 2.9%, and Germany's Xetra Dax gave up 1.5%. The Paris Cac fell 1.7%.